Duke’s $6.7B Piedmont purchase digs heels deeper into gas

By Kristi E. Swartz | 10/27/2015 08:18 AM EDT

Duke Energy Corp. has become the latest electric utility to buy a natural gas company, giving the energy giant more growth opportunities than what it could do on its own, analysts said.

Duke Energy Corp. has become the latest electric utility to buy a natural gas company, giving the energy giant more growth opportunities than what it could do on its own, analysts said.

The nation’s largest electric company yesterday said it will buy Piedmont Natural Gas Company Inc. for a total enterprise value of $6.7 billion. The deal would give Duke 1 million additional natural gas customers in North and South Carolina as well as Tennessee, tripling the company’s number of customers from local distribution natural gas companies.

Based in Duke’s hometown of Charlotte, N.C., Piedmont Natural Gas has joint ventures that include a gas marketing company, a liquefied natural gas facility, underground storage, and planned or existing pipelines.


Duke and Piedmont also are involved in the proposed 500-mile Atlantic Coast pipeline, which would deliver gas from the Marcellus and Utica shale plays to North Carolina.

The combined company will have a new natural gas operations unit that will include the local distribution gas utilities and gas infrastructure investments.

"This transaction establishes a valuable natural gas platform — and will provide strong growth opportunities for years to come," said Lynn Good, Duke’s CEO, on a conference call with analysts.

Good told investors yesterday that Piedmont already has its own growth plan. The combined company can leverage Duke’s marketing position in the Carolinas and the Midwest, she said. Duke serves North and South Carolina, Florida, Indiana, Kentucky and Ohio.

"We believe there will be additional opportunities to build on that and find additional infrastructure investments that will complement the business we’ve put together," she said.

Duke has been pushing into the natural gas industry for more than a year. It teamed up with Dominion Resources Inc. last year to take the lead on the Atlantic Coast pipeline and has an interest in the proposed Sabal Trail pipeline, which would run into Florida.

Pipelines are a significant capital investment for utilities, which means they will earn a large return. Buying a natural gas company is no different in terms of providing future high-capital, high-growth investments, analysts say.

‘Get gas, buy capacity’

This is particularly critical now as the nation continues to shift away from coal and toward natural gas.

"The grid is going to be increasingly relying on natural gas. That’s the new wave of spending," said Shar Pourreza, an analyst with Guggenheim Partners LLC.

Not only will natural gas provide more growth opportunities, but investors place a higher value on local distribution gas companies than on electricity utilities, Pourreza said.

"Everybody is buying these large utilities that will lend themselves to more infrastructure build-out," he said. He expects the trend to continue to the point that it will be tough to distinguish an electric company from a natural gas one.

Duke touts itself as being the electric utility industry’s leader in the transition away from coal toward natural gas. The company has shut down half of its 14 coal-fired power plants in the last three years. Meanwhile, it has opened five natural gas power plants since 2011, with another one set to open in South Carolina in 2017.

The moves are important as federal environmental mandates have pushed coal out of favor.

Electric companies have balked at such rules, arguing that there is not enough pipeline infrastructure to support the increased need for natural gas. What’s more, utilities say the current low natural gas prices will not last, especially as the demand goes up.

"Abundance of natural gas will become an increasingly important part of the energy mix as it shifts away from coal to continue," Good said.

Duke is the second major electric utility in the nation — and the Southeast — to announce the purchase of a natural gas company in recent months. Atlanta-based Southern Co. said in August it will buy AGL Resources Inc., the nation’s largest natural gas distribution-only company, giving the company access to 80,000 miles of natural gas pipelines.

Buying a natural gas company to get more gas is a small part of the equation, however, analysts say.

"Duke is a huge company, as is Southern, and they’ve been building natural gas plants for a long time," said Paul Patterson, a utility analyst with Glenrock Associates LLC. "They can get gas, they can buy capacity."

Instead, electric companies can use natural gas companies to fuel future growth as their own demand has slowed. Buying a company like Piedmont could put Duke on a track to obtain customer growth of between 1.5 and 2 percent, analysts say. Otherwise, electric utilities are looking at customer base growth of between 0.5 and 1 percent.

With this in mind, Andrew Bischof, an analyst with Morningstar Inc., said buying Piedmont is a natural extension of Duke overall.

"It’s a way to support Duke’s longer-term growth," Bischof said.